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Smoky Mountain Corporation makes two types of hiking boots--the Xtreme and the Pathfinder. Data concerning these two product lines appear below. Selling price per unit Direct materials per unit Direct labor per unit Direct labor-hours per unit Estimated annual production and Xtreme $ 140.00 $ 72.00 $ 24.00 2.0 DLRS 20.000 units Pathfinder $ 99.00 $ 53.00 $ 12.00 1.0 DTH 80,000 units The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below: Estimated total manufacturing overhead Estimated total direct labor $ 1,980,000 120.000 DE Required: 1. Compute the product margins for the Xtreme and the Pathfinder products under the company's traditional costing system. 2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool Includes organization-sustaining costs and die capacity costs): Estimated Expected Activity Xtreme Pathfinder Total 40,000 80,000 120,000 100 300 Activities and Activity Measures Supporting direct labor (direct labor-hours) Batch setups (setups ) Product sustaining number of products) Other Total manufacturing overhead coat 783.600 495,000 602,400 99,000 $ 1,980,000 Na

Answer 1

Answer:

1) Product margins under Traditional costing system:

	Xtreme	Pathfinder
Selling price per unit	$                      140	$                       99
Less
Direct Materials per unit	$                        72	$                       53
Direct Labor per unit	$                        24	$                       12
Manufacturing overhead per unit (See workings)	$                        33	$                       17
Product Margin per unit	$                        11	$                       18
Estimated annual production unit sales	$                20,000	$ 80,000
Product Margins	$ 220,000	$ 1,400,000

Total product margin = $1,620,000

Workings:

	Xtreme	Pathfinder	Total
Estimated annual production unit sales	20,000	80,000
Direct labor hours per unit	$                          2	$                             1
Total labor hours	$               40,000	$                   80,000	$ 120,000
Total manufacturing overhead ( in the ratio of labor hours)	$ 660,000	$             1,320,000	$        1,980,000
Manufacturing overhead rate per unit	$                        33	$                           17

2) Product Margins under Activity based cost System:

	Xtreme	Pathfinder
Selling price per unit	$                140.00	$                 99.00
Less
Direct Materials per unit	$                  72.00	$                 53.00
Direct Labor per unit	$                  24.00	$                 12.00
Manufacturing overhead per unit (See Workings)	$                  44.62	$                 12.36
Product Margin per unit	$                   -0.62	$                 21.64
Estimated annual production unit sales	$          20,000.00	$        80,000.00
Product Margins	$        -12,400.00	$ 1,731,400.00

Total product margin = $1,719,000

Net product Margin = $1,719,000 - $99,000 = $1,620,000

Workings:

Activity Rate:

Activity	Activity Measure	Estimated overhead cost	Expected total activity	Activity Rate
Supporting Direct labor	Direct labor hours	$ 783,600	120,000	$ 6.53
Batch setups	Setups	$ 495,000	300	$              1,650.00
Product sustaining	Number of products	$ 602,400	2	$ 301,200.00
Other	NA	$                 99,000	NA	NA
Total		$           1,980,000

Manufacturing overhead rate per unit:

Activity	Activity Measure	Activity Rate	Xtreme		Pathfinder
Supporting Direct labor	Direct labor hours	$ 6.53	40,000	$ 261,200	80,000	$ 522,400
Batch setups	Setups	$            1,650.00	200	$ 330,000	100	$ 165,000
Product sustaining	Number of products	$ 301,200.00	1	$ 301,200	1	$ 301,200
Total				$ 892,400		$ 988,600
Estimated annual production unit sales				20,000		80,000
Manufacturing overhead rate per unit				$                 44.62		$                12.36

Thank You.